Metal Construction News, August 2016

However for a small business owner especially a contractor that lure to own a piece of equipment may be bad for the bottom line When I ran my own company I adopted the attitude that I wanted to own as little as possible I craved fl exibility In many ways I probably went too far with that and hurt my company Somewhere in the middle lies the right strategy and that strategy will vary depending on the contractor growth stage of the company type of work and type of equipment Heres what I learned from going through this process and working with an accountant that I think will be valuable to our readers Groundwork Before you begin even evaluating whether to buy lease or rent a piece of equipment you need to take a careful look at your company What does your balance sheet tell you Do you have so many liabilities that in the short term your assets wouldnt cover them This is usually expressed as the current ratio A current ratio of 10 means you have the assets necessary to cover your current liabilities Contractors generally aim for a current ratio of 20 You also need to evaluate if you have the capital necessary to purchase a piece of equipment Often contractors are profi table but dont have enough capital because of a cash fl ow bind If thats the case now is not the time to be purchasing equipment It will only exacerbate the cash fl ow issue and could push a company to becoming unprofi table If your fi nancials are in good shape and you have the capital available you need to look into the future and determine whether you might need to borrow money in the near future Financing an equipment purchase through an institution with which you have a history may make sense But if you may need to go to that bank and ask for a loan in the next year a leasing arrangement where the transaction wont appear on your books as a liability is probably the better option The last piece of groundwork necessary is to do an honest accounting of the need for the equipment This depends a lot of course on the type of work you do and the equipment needed It could be a skid steer loader backhoe panel lift or even just a new pickup truck For ease of simplicity lets consider it a new truck Is it a replacement If so how dire is the condition of the previous truck and do you really need to replace it Is it an additional truck This depends a lot on the prospects for the growth of your company Every growth pattern has a tranche of investment at particular points as you jump to the next growth stage If you are at such a point you will be facing growing pains and cash fl ow could become tight Make sure this investment isnt the one that becomes the one putting you over the edge How much will the truck be used An investment that sits in the garage or parking lot half the time is more albatross than asset Evaluate how much youre currently using the equipment you have and determine that total need Generally a new piece of equipment should be used 60 to 70 percent of the time Otherwise its not a good acquisition Buy vs Lease After you have made the decision to obtain a new piece of equipment you have to determine whether you should buy or lease it The pros and cons on this decision are actually pretty straightforward Leasing Pros You wont have to pay for maintenance since the leasing company is responsible for repairs caused by normal wear and tear Leased equipment turns over more quickly so you can keep up with the latest technology You dont want to get stuck with outdated equipment that puts you at a competitive disadvantage but neither do you want to be chasing the new gadget You dont need a big down payment so your upfront costs are considerably less Leasing payments are predictable allowing you to budget more easily From a tax point of view leasing is often 100 percent deductible Leasing Cons Over time leasing costs more than purchasing Some leasing terms may outstrip the time when you need the equipment so you could end up paying for equipment you no longer need Since you dont own it you cant sell it Leasing gives you no equity in the equipment There can be gray areas in leasing agree ments about maintenance Nail down exactly what you will be responsible for so you dont get in a disagreement over a repair and incur unexpected expenses Buying Pros Its yours You own it You can do whatever you want with it including making alterations Want a custom paint job on your truck to match your branding No problem Go ahead and short stack the muffl ers Nothing like chrome to brighten a day Buying is actually much easier No contracts No agreements You can get exactly what you want Many leasing companies have limited options so you may have to settle for a piece of equipment that doesnt match your exact needs Being able to sell it also means you can recoup some of your investment The IRS allows for the depreciation of equipment Check with your accountant because like many IRS rules there are specifi c criteria and you want to make sure youre meeting the requirements before you commit You also can deduct insurance taxes and interest Buying Cons Going in your bank account is going to take a hit because the upfront costs are higher Because of that you may have to settle for lower cost equipment Technology changes rapidly especially in an offi ce environment Ending up with out of date equipment can reduce your effi ciency and hurt your company Maintenance maintenance maintenance Its your burden and your cost The cost extends beyond just the obvious elements of paying for it It also includes the increased need to manage the equipment Many contractors without strong equipment management procedures fi nd that an expensive tool or piece of equipment can unexpectedly become a rusted hulk because no one was accountable for its maintenance Renting For companies just starting out or for smaller companies the best option may be to rent your equipment It preserves your capital which youre plowing back into the company to help it grow or just plain dont have Renting also gives you more fl exibility Rental agreements provide many of the same benefi ts of leasing but with a few signifi cant differences First the terms are more fl exible When youre done using the equipment you return it so youre only paying for equipment that is being used Like leases rental agreements include maintenance provisions which will allow you to control costs on repairs Finally if you dont like the equipment if it isnt working for what you need you just return it and rent what will work August 2016 METAL CONSTRUCTION NEWS 21 www metalconstructionnews com

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